Quote:Fears Spain can't save its troubled banks sparked a selloff in Spanish government bonds Wednesday and prompted a broad decline in stock markets and the euro, leaving Europe's common currency in its most precarious state in months.

(Reuters) - Spain is expected to request European aid for its ailing banks at the weekend to forestall worsening market turmoil, becoming the fourth and biggest country to seek assistance since the euro zone's debt crisis began, EU and German sources said.

Two senior EU officials said finance ministers of the 17-nation single currency area would hold a conference call on Saturday to discuss a Spanish request for an aid package, although no figure had yet been set.

The Eurogroup would issue a statement after the meeting, they said.

"The announcement is expected for Saturday afternoon," one of the EU officials said.

The move comes after Fitch Ratings slashed Madrid's sovereign credit rating by three notches to BBB from A on Thursday, highlighting Spain's exposure to its banks' bad property loans and to contagion from Greece's debt crisis.

I wouldn't trust these fortune-tellers from "ratings agencies" for one second, but various financial markets follow them blindly. Lower credit rating means higher risk premium and the latter in turn means higher interest rates.

Quote:NICOSIA (Reuters) - Cyprus won support from its euro zone partners on Wednesday for emergency funding to prop up its banks, crippled by their Greek debt holdings, in assistance which will probably include aid from the IMF.

The Mediterranean island, whose economy accounts for just 0.2 percent of the euro zone, is the fifth country to be forced to seek protection from the crisis enveloping the bloc.

The euro is headed south today against all comers except The Great British Krona (as FT Alphaville calls sterling) which is engaged in a nosedive of its own. The reason this time? Spanish 10 year debt is yielding 7.5pc, half of what it ought to yield but enough to spook markets not yet ready to face the inevitable deflation of what has long been a bond super-bubble.

This bubble is particularly evident in France. The debt levels which the country has are as unsustainable as Britain’s, yet its policies are more irresponsible and its remedies more restricted. Although it is considered a core country in the eurozone, France’s economic profile now bears more resemblance to Greece’s the Germany’s.

Public debt in France is at 86.1pc of GDP (146pc if ECB liabilities and bank guarantees are included). The projected budget deficit this year is 4.5pc, with France having exempted itself from the EU’s instruction to bring deficits down to 3pct by the end of the year.

These numbers are not unusual in the context of eurozone economies in general. What distinguishes France is the lack of political will to address them and, as a consequence, a projected debt to GDP ratio which would place it firmly amongst the PIIGS grouping,

A 2010 paper by the Bank of International Settlements – cited by economist John Mauldin in his brilliant recent dispatch on ‘hidden lions’ – sought to model the likely effects of three separate policy paths by European governments. These range in severity from governments essentially carrying on as they are, to the most extreme austerity the authors believe to be politically possible, a gradual downwards movement in government spending while age related entitlements are frozen.

Don't bet on it. Sure, things look bad. The crisis, well into its third year, has forced Greece, Ireland, Portugal, Spain, and now Cyprus into various forms of international financial rescue programs, and it shows no signs of abating. After two years of denial and half-measures, market participants have little faith in the ability of Europe's policymakers to reach a solution. Spanish bond yields are frighteningly wide and those of Italy, the continent's most prolific borrower, are following closely behind. This summer's announcement a fuzzy-at-best plan to recapitalize Spanish banks and create new mechanisms to channel pan-European resources to Europe's stricken financial sector relieved market pressure for all of a few hours. Perhaps most alarmingly, no one seems to have a plan, with British Prime Minister David Cameron warning that the eurozone must either "make up or break up" -- with the implicit threat that the latter is increasingly likely.

But before writing the euro's obituary, let's remember: The driving force behind a European currency union was never purely or even principally financial. It was political -- and these binding forces remain strong. After centuries of bloodshed on the continent culminating in the last century's two world wars, the European Union (EU) and ultimately the euro arose from a deep-seated desire to abolish the risk of state-to-state conflict. A slide back to nationalism is a constant fear in the minds of European political leaders and peoples. And so, in spite of growing concerns about the benefits of sharing a single currency across 17 countries, member states and their publics remain highly supportive of the European project and the euro. While the crisis has caused this support to decline a bit, studies consistently show that Germans, French, and Spaniards favor remaining in the euro. Even upwards of 70 percent of Greeks, who are in their fifth year of recession and looking forward to a decade of grinding austerity, claim that they want to stay in the currency union. They may not get their wish (boundless hope can overcome an awful lot, but not the cold mathematics of Greece's debt burden) but their robust support illustrates the basic fact that the political will to maintain the euro remains strong.

It's true that Europe doesn't yet have a comprehensive plan to balance sensitive and increasingly difficult issues of national sovereignty, financial resources, and disparate economic models and strength among eurozone members. It's also true that this marks a decisive break from the post-World War II trajectory of European integration, which was built on grand visions both successful (the common market and common currency) and less so (the Lisbon Treaty that set the foundation for today's host of supranational European political institutions).

What Europe does have, though, beyond sheer will, is a process, however tortured and painful it may look to those on the outside, to ensure that the euro and the EU hold together. The political and economic costs of a eurozone implosion remain too high and the benefits of maintaining the common currency too real for the countries involved, as self-defeating as they appear at times, to allow a crack up. Europe will likely make steady, halting, and at times apparently counterproductive steps toward a banking union, limited fiscal federalism, and a path to political union. The path from here to there won't be smooth, just as the past two years haven't been -- but it will likely be enough to keep the currency union.

To be clear: We could very well be heading for a deep crisis, and we might even see the exit of one or more member states, with Greece the most likely. But other peripherals won't see a Greek exit as a signal to leave themselves; in fact, measures taken as a consequence may well strengthen their own prospects within the currency union. The likelihood of the eurozone imploding and the reintroduction of national currencies across a broad swath of Europe thus remains exceptionally small.

"It's All Greece's Fault."

Nope. Greece definitely shares a great deal of blame for Europe's current predicament (and, of course, its own). Athens lied about its budget and finances to get into the euro back in 1999, lied about them to stay in the euro in the decade since, and continues to bob and weave as it pretends to comply with the terms of its bailouts, agreeing to absurdly high projections for anticipated growth rates, tax revenues, and privatization revenues. Greece took Europe for a ride, and now both are paying the price.

But Greece's seemingly miraculous overnight transformation from profligate to responsible required willful blindness from European authorities. And the reason that dissimulation was even available to Greece in the first place lay in the faulty construction of the euro itself, in which all eurozone sovereign risk was made to be a thing of the past.

In the pre-euro 1990s, markets widely and correctly assessed Greece as a poor credit risk. As a result, Athens was able to borrow only infrequently, and had to pay high rates to do so. Over the years, when Greece had problems paying back its highly priced debt, it defaulted, devalued, borrowed more, and the cycle continued.

Joining the common currency was assumed to eliminate both Greece's credit risk (that it wouldn't pay back its creditors) and currency risk (that it would pay them back in a different currency worth far less than the one in which they borrowed). These may have been noble aims, but the economic logic rested on assumptions that were faulty at best. Milton Friedman cited these flaws, among others, when he predicted that the euro would be lucky to survive the decade. As he and others warned at the time and is all too apparent now, adopting the euro didn't magically transform countries like Greece into paragons of financial probity. Yet European banks took the elimination of sovereign credit risk at face value and lent Greece huge sums at historically low interest rates, comfortable in the knowledge that the European Central Bank (ECB) would provide virtually instant liquidity for newly issued Greek bonds, so that the lenders could start the whole process again shortly thereafter. And not only did the process continue, but it grew over a decade until the amounts involved became unsustainable, and the crisis as we now know it hit.

The flow of cheap funds was supposed to lead to investment and commerce in Greece and other "peripheral" European countries, which would eventually lead to an economic convergence with the eurozone core. When Greece borrowed money by the truckload, it was doing precisely what the eurozone architects and the ECB intended. Greece undeniably spent its windfall poorly -- taking few steps to fix systemic problems like tax evasion, corruption, and public sector bloat. But the only reason it had money to spend so poorly was due to the overly optimistic (and at times inherently delusional) assumptions that underlay the common currency system. Polonius had it right: "neither a borrower nor a lender be." In Europe, both parties share the blame for ignoring that advice.

Call me paranoid but I suspect the entire mess may be deliberate. How else would they justify the Fiscal Compact? All things considered, I expect this treaty to become a precursor of a new treaty (or a series of treaties) that will eventually create a fiscal union.

Quote:Euro Revolt Spreads To Austria: “Europe Can Only Function If Every Country Has Its Own Currency”

Germany and Austria may have their differences, and their love for each other may not always be palpable, but when it comes to money, they’re joined at the hip. And have been for decades.

The peg of the Austrian schilling to the Deutsche mark that was put in place in the early 1970s survived even external shocks, for example when Italy devalued the lira on January 6, 1990, or again on September 14, 1992.

These devaluations solved, albeit inelegantly, Italy’s competitiveness problem, and by 1993, an export boom led to large and enduring trade surpluses—that gutted the industries in neighboring Austria, particularly in the State of Carinthia.

Yet Austria maintained the peg to the DEM. Over the years, it put its economy more or less in order. Italy, however, is once again in dire need of a big fat devaluation.

So as political revolts were breaking out left and right in Germany against—and for!—endless bailouts of troubled Eurozone countries, Austria set off its own fireworks: Frank Stronach announced that he’d form a political party by the end of September for the national election in 2013—with the goal of pushing Austria out of the Eurozone.

He is the billionaire founder, Director, and Honorary Chairman of the Canadian automotive component maker Magna International that wanted to buy bleeding-to-death Opel from bankrupt GM in 2009. What raised some eyebrows at the time was the source of funding: Sberbank Rossii, a big Russian bank majority-owned by the Central Bank of Russia.

The fundamental principles of his party would be “truth, transparency, and fairness,” Stronach said in an interview. A core group of people was in place, the party platform was nailed down, though some polishing would still be required. “We’re against the crony economy in this country, we’re against corruption,” he said. There were elements of Ross Perot. “Government is the management team of a country; unfortunately, this management team is made up of politicians.” Austria is “over-administered,” the fault of the government, not of civil servants. “I’ve always said there are no bad workers, only bad managers.” Europe, he added, should guarantee peace along with free movement of goods, people, services, and capital, “but Europe can only function if every country has its own currency.”

Quote:BRUSSELS — The European Commission insisted on Friday that the 6,000 banks in the euro area be centrally supervised to prevent future financial crises, even though leading German politicians expressed skepticism about the breadth of the plan.

The proposal, which the commission said it would formally present on Sept. 12, is expected to give the European Central Bank the power to withdraw banking licenses and order other adjustments, representing a sharp turn away from national controls. The proposal stops short of allowing the central bank to wind down problem banks, leaving that function to national regulators.